Shilling sinks to 123.15 on latest Fed rate hike

The Kenyan shilling sank to the lowest level in history on Monday, on ongoing aggressive monetary policy in the US.

The shilling which has been on a depreciation mode since January opened the day at 123.15 compared to 123.05 on Friday.

Pundits are forecasting even tougher times ahead for the shilling and other weaker currencies as the US insists on carrying the tough monetary stance in 2023.

The Federal Reserve on Wednesday raised its benchmark interest rate to the highest level in 15 years, indicating the fight against inflation is not over despite some promising signs lately.

Keeping with expectations, the rate-setting Federal Open Market Committee voted to boost the overnight borrowing rate by half a percentage point, taking it to a targeted range between 4.25 per cent and 4.5 per cent .

The increase broke a string of four straight three-quarter point hikes, the most aggressive policy moves since the early 1980s.

Top honchos at the US's apex bank have confirmed plans to continue raising the rate next year to flatten highest inflation in 40 years.

Financial analyst David Maweu tells the Star that the rate hike is likely to further strengthen the dollar which has gained 12 per cent since January, trading almost at par with th Euro.

"The high demand for dollars as investors seek to shield themselves from currency volatility is likely to lift it further, making it tougher for traders in weak currency jurisdictions like Kenya,"Maweu says.

He adds that the impact of last week's Fed hike will be felt at the Nairobi Securities Exchange (NSE) as investors flock to less risky markets.

According to him, although the Central Bank of Kenya has also raised the base lending rate to manage inflation, gains made will be reversed by happenings in the US.

"Last month, inflation dropped slightly by 10 basis points. I don't see the same case for December. The inflation will at the best stagnate at 9.5 per cent as importers pass extra bills to consumers," he says.

Several analysts have projected the shilling to end the year at between 124-125 against the greenback.

A currency trader Samson Ojiambo, is afraid that dollar scarcity will excalate in coming days as Christmas draws closer.

"We are buying a dollar at a near 130. This is not sustainable for any business. The rate in US is likely to worsen the situation as Kenya's forex reserves continue to drop,"Ojiambo said.

CBK governor Patrick Njoroge however continues to wear a brave face on the dropping FX volume, insisting that the available amount is sufficient.